The China Rebound

Are we depending too much on China to rescue the global economy? (Jan 29, 2023)

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Last weekend it was reported that Israeli drones attacked military targets across Iran. A few days ago, and probably not coincidentally, the US and Israel held massive joint military exercises. This was likely an effort to impact weapons bound for Russia, Iran’s fast ally and partner in evading sanctions.

My immediate reaction was what this cannot be good news for China, Iran’s largest trading partner and key buyer of Iranian oil. This latest event can be added to a list of other obstacles to China’s economic recovery post Zero-Covid. Hopes of a boom in Chinese fiscal spending and retail consumption are likely to be delayed much longer than the current early spring consensus. Forecasts of commodity prices in particular are probably overly optimistic.

Now some even worry that Chinese demand will be so great that it will create a second spike in inflation forcing Jay Powell to hike more aggressively than planned. Don’t hold your breath. China might not be the trigger the rest of the world expects. Here are just a few of the other challenges that could prevent China from quickly regaining its economic footing: